'Deadlock need not spark financial crisis'

Economy May 09, 2014 00:00

By The Nation

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Despite the prolonged political deadlock, the Bank of Thailand believes gross domestic product is unlikely to slide into recession this year and a crisis may not occur, given the country's sound economic fundamentals. Concerns remain, however, over slowin

“A situation of unrest remains, so we may revise down our [GDP growth] forecast,” BOT Governor Prasarn Trairatvorakul said. “First we need to see significant economic figures, particularly the ones for the first quarter, which will be announced this month. After that, the June Monetary Policy Committee meeting will release new [estimated] figures, which [will probably] be lower than the previous ones.”

The central bank expects the MPC to announce a positive figure for GDP growth this year in its meeting next month, although the figure may be lower than the previous estimate of 2.7 per cent.

Prasarn conceded that the political factor had affected economic growth. However, he said it need not spark a crisis thanks to Thailand’s solidity in the money market, lending, system of financial institutions and current-account balance.

“A crisis may not occur,” he said. “However, problems remain. Sellers are selling less and the number of employees is lower. Employment may weaken in the short term. If we do nothing good now, there could be a problem in future.”

Investment should be addressed urgently, given its connection to other planks of the economy including employment, income and future economic strength, he said.

While acknowledging that it was unlikely the political crisis would reach resolution by the midyear, Prasarn predicted that an end to the deadlock would trigger a speedy recovery for the Thai economy.

He put slow growth down to a likely drop in domestic demand counteracting an expected improvement in exports.

“We projected export growth at 4.5 per cent. However, we may revise it down, since first-quarter export figures were lower than expected.”

Some economists have advised depreciation of the baht to boost exports. Prasarn, however, rejected that tactic, saying that economic balance and conformity had to be considered. The money market is also confident in the stability of the baht. This is a positive sign and signifies wider confidence in Thailand’s macro-economy. Prasarn acknowledged that the economic situation would remain fluid if there was no end to the political strife.

“We have to consider adequacy and balance for exchange rates,” he said. “When we talk about the depreciation of the baht, some, such as foreign investors, will not like it. Foreign investors tend to lack confidence in economies with depreciating currencies.”

Meanwhile, Moody’s Investors Services said the Constitutional Court’s decision on Wednesday that ousted Yingluck Shinawatra as caretaker prime minister could spell danger for the economy.

“The ruling is credit-negative because it threatens to prolong the country’s political crisis, which has lasted for six months and makes a near-term compromise solution unlikely,” the rating agency said in a report. “It also heightens the risk of violent clashes between opponents and supporters of Yingluck’s Pheu Thai Party. Both would negatively affect investor and consumer confidence and increase the downside risks to Thailand’s growth outlook for 2014-15.”

Moody’s noted that Wednesday’s ruling marked the third time in six years that the judiciary has ousted a Thai prime minister, including the court’s late-2008 verdicts on Samak Sundaravej and Somchai Wongsawat.

“Thailand’s political crisis is increasingly challenging the country’s strong credit fundamentals. The government’s robust financial position – underscored by low funding costs, a favourable debt structure and limited external vulnerabilities – supports our ‘stable’ outlook on Thailand’s rating. But a continuation of political turmoil would erode the country’s core credit strengths,” it said.

Thailand’s real economic growth has already been negatively affected, with the economy expanding only 2.9 per cent in 2013 – far below the 2012 level of 6.5 per cent and weaker than an average of 3.8 per cent of the past 10 years. Moody’s noted that the most recent development presented further downside risks to its growth forecasts for Thailand of 2.7 per cent in 2014 and 3.2 per cent in 2015.